For months, financial institutions wondered what the financial reform legislation moving through Congress would mean for their businesses. The bill is now law, but a great deal of uncertainty remains because of the rulewriting that must now be done on debit card interchange fees and other topics.
Debit card interchange fees are now subject to regulation by the Federal Reserve Board, which must write and issue final regulations affecting the fees by April 21. Thus, the next eight months are crucial for financial institutions, payment processors and consumers who have a stake in the convenience, security and economic viability of debit cards and transactions.
The prospect of the Durbin amendment's being included in the financial reform bill was met with nearly universal uneasiness among banks. Talk to bankers now, however, and you get a broader range of reactions; the new law requires that the amount of any interchange transaction fee be "reasonable and proportional to the cost incurred by the issuer with respect to the transaction."
The reaction we've heard from some of our clients is that they are considering abandoning their debit card programs. Many more are choosing inertia — opting to wait and see what the Federal Reserve's rules require before revising their debit card and payment strategies. These reactions are understandable, but the institutions that will thrive in the new regulatory environment are those that act now.
It is important to remain focused on one key fact during this time: Debit cards are not going away. Today's consumers demand the flexibility and real-time payment capability their debit cards provide. They also appreciate the safety and convenience of a payment vehicle that reduces their need to carry cash or a checkbook.
PIN debit gives consumers the security of two-factor authorization, and it is a vital component of most people's financial product set, which includes a demand deposit account, online banking, bill pay, person-to-person payments and automated teller machine access. A consumer is no more likely to abandon his or her debit card than to trade in a mobile device for a rotary phone. The utility of the debit card is just that strong.
Financial institutions should use this as an opportunity to take advantage of the new landscape. Here are a few strategies issuers can pursue now:
- First, issuers and payment networks should make sure their voices are heard as the Federal Reserve works to clarify the language of regulations for debit transaction fees.
- Second, now is the time for issuers to take a closer look at operating costs, which could help them be more competitive no matter where interchange fee thresholds are set. Financial institutions can look in many areas to reduce costs, and working with an efficient, low-cost payments network is a good place to start.
- Third, and perhaps most important, financial institutions can use the next eight months to re-evaluate or develop their payment strategies. The business environment will reward innovation. Disruption has occurred, and innovators will win. Financial institutions that are able to offer transaction and channel diversity — everything from ATMs to bill pay, Internet PIN debit, mobile banking and person-to-person payments — can capture consumers who are increasingly impatient with financial institutions that do not offer services on their terms. Debit will remain a key part of the payments mix because it is a safe, secure product that can build customer loyalty and retention.
The largest banks will continue to invest in innovation. Smaller financial institutions, though they are exempt from the interchange provisions of the Durbin amendment, must still compete with big banks that can offer more choices to consumers. But by working with partners that have the scale, resources and expertise to innovate, community banks and credit unions can also create a competitive product offering.
Financial institutions should use this transition period to develop or refine a payments strategy as the foundation from which to leverage a competitive edge in the marketplace. Issuers that focus on reducing costs and planning strategically now will reap the benefits immediately. Then next spring, whatever the final regulations may be, they will be positioned to win in the long term.